Leggett & Platt, Incorporated (LEG) Earnings Call Transcript & Summary

Thank you for joining us. Today, we have Leggett & Platt presenting at our conference here with us from the company, our CEO, Mr. Dolloff, and from IR Casey Branson, with Mitch, I'll turn that over to you, and maybe we'll have a little time at the end for Q&A. But also, thank you for joining us. You guys have been long supporters of this conference, all the way back to my predecessor. So we appreciate it.

Yes, pleasure to be here. For sure. Thanks, everybody, for joining us this afternoon. Great to be with you. I appreciate your interest in Leggett & Platt. We've got a lot of slides to cover, not a lot of time. We'll save some time for Bobby, so I'll try and move through it quickly. This slide is just our obligatory disclaimer on forward-looking statements. I won't spend any time here. This slide really is who we are. It reflects our strong balance sheet and cash flow. We have a history of strong cash discipline. We have a high dividend yield. In 2022, we increased our dividend for the 51st consecutive time. We're a leader in most of our markets with a few large competitors. It does mean we don't have competitors, but a few of them have the breadth of products or scale that we do or the technical capabilities that we have in many of our industrial markets. And we have opportunities for long-term growth. We'll dig into this more. We've got particularly large addressable markets in bedding and in automotive. And we have skin in the game. We think like investors because we are investors. Here you see a quick look at our portfolio. Bedding is our largest business with about 42% of revenues. Automotive is the second largest about 18%. And then you see a pretty diverse group of companies across there. I think about automotive, aerospace and hydraulic cylinders. Those are more sort of industrial-related businesses and the others, generally more consumer durables related. We'll see that on the next slide. And here you see our geographic breakdown. So 65% Europe, about 30% U.S., about 10% in Europe and China. And here's a quick look at our segments. We're broken down into 3 segments: bedding, which is largely vertically integrated. We'll talk about that. More specialized products, which I just listed. And then our furniture textiles and furniture flooring and textiles products, home furniture, work furniture, flooring and textiles. So a quick look at our macro market exposure. You see about 55% consumer durables, automotive and then those commercial industrial markets that we had talked about. So after really surging in 2020 and 2021 with that focus on the home after the lockdown in Covid lockdown in consumer durables, we saw quite a bit of softening in 2022 with high inflation and the impact of high interest rates and their impact on consumer confidence. If you think about consumer confidence is really the key economic indicator for our businesses, and that remains challenged in the consumer durables area for us, for sure. Housing turnover is also important, but because of the amount of replacement activity that there are in furniture and bedding activities, I think consumer confidence is the most important one for us. Okay. Let's dig in a little bit on more current topics. So real quick on '22 highlights. Sales $5.15 billion, up about 1% from the prior year. EBIT, EBIT margins and EPS were down versus 2021. The key drivers here were really lower volume and lower overhead absorption as we reduced production to manage inventory and ended the year in a really good position there. We also had some negative impacts from operational inefficiencies in our specialty foam business as well as raw material and transportation cost recovery challenges in automotive business. Those were partially offset by strong metal margins in our Steel Rod business and pricing discipline in our furniture, flooring and textiles business. So good news is we generated strong cash $441 million, and as I said, increased our dividend for the 51st consecutive year. Here's a look at our guidance for 2023. At the midpoint, sales is about $5 billion, reflecting the continuing economic uncertainty that we face here. At the midpoint, we expect volume to be down by low single digits, mainly driven by bedding and FF&T. You'll notice that specialty products are expected to be up high single digits. So we see stronger market there. We also expect a drag on sales from raw material deflation and currency impact, partially offset by some gains from acquisitions that we completed in 2022. From an EPS standpoint, our midpoint is $1.70. Midpoint again reflects lower metal margins in our steel rod business in 2022. I'd just say that those remain at historically very high levels but lower than 2022, lower volume in some of our businesses and moderate pricing pressure from deflation. I guess, again, strong operating cash flow expected here of $450 million to $500 million. A quick look at our commodity impacts. Our biggest commodities are steel and chemicals, largely used in bedding, but in some of our other businesses as well. Those reached record highs in 2021 and 2022. We routinely pass along inflation and deflation in these commodities. We were successful in doing so during these time periods. A great example would be in our innersprings business, about 60% of our customers are on contracts. That have pass-through clauses in them. The pass-throughs typically lag about 90 days up or down. Similar on the chemical side with a lag of about 30 days. I mentioned automotive impact of raw material costs. That's the one part of our business that typically operates on fixed cost, actually with cost downs. That's just how the industry works. So things have to get really high pressure on inflation before we are able to get cost prices moving. That happened in 2022. We probably recovered 1/2 to 2/3 of the inflationary impact, and we expect to recover the rest of it in this year. So what are we doing? We can't control the macroeconomic environment, but we are focused on controlling the things that are in our power. So continuing to drive strong cash flow, working with our customers on new product opportunities and continuing our focus on operational efficiency, and we'll dig into these as we go through the rest of the presentation. So enduring fundamentals, this is really just a deeper dive into the core values of our business. The center of it is really strong cash flow. You've seen it in our guidance in the prior year. We have a long history of that, including an economic downturns, the key point of resiliency for us. Our operating cash flow has exceeded capital expenditures and dividends for 33 of the last 34 years. We expect to exceed it again in 2023. We also have a focus on maintaining investment-grade credit rating. We have a $1.2 billion revolving credit facility and no significant maturity until November of 2024. Our uses of cash have really remained consistent for quite a long time. Our first priority is funding organic growth. Shortly following that, barely following that is paying dividends. You've seen from our dividend record. Third, we'll fund strategic acquisitions and with excess cash, we'll repurchase shares. I mentioned our dividend growth already. I'd just reiterate that we have a 5% dividend yield. It's one of the highest yields among the 50 companies that are known as dividend kings. Lets' talk a little bit about profitable growth. The real key to profitable growth to me in our business is portfolio management. We've added new businesses that get us into attractive new markets and help diversify our business. For example, aerospace and hydraulic cylinders that we've mentioned before. We've also added businesses that can add capabilities that we need or fill strategic gaps, our specialty foam business that we'll talk about more. I think, I completed that. But it's important to focus and take action on businesses that aren't meeting our return targets or margin or cash flow targets. You've seen that we've exited a number of small businesses over the last several years that really just weren't strategic and weren't adding a lot of value. So we'll continue to do that to take a hard look at our portfolio management, but also to correct businesses where we think we have the opportunity to do so, that are underperforming. And the restructuring that we completed with our Home Furniture business, I think, is a great example of that. The long-term key to driving profitable growth for us really revolves around innovation, creating high-value products that serve consumers, provide differentiation for our customers and continue to drive our competitive advantage. So that's really the foundation for us. So let's dig in a little bit deeper into our bedding and automotive markets. These are our largest business, as I said, they have really large addressable markets. Addressable market for U.S. bedding is about $11 billion. A few years ago, not too long ago, our addressable market there would have been $5 billion with about $3 billion coming from Innersprings of which we had large market share, about $2 billion from foundations. And with the emergence of direct-to-consumer online sales and compressed mattresses and really just kind of opening up the bedding market where it used to be only a channel through the OEMs to retailers. We thought that the dynamics were shifting. And we took a deep dive into looking at the market that led us to the specialty foam acquisition that helped us expand our addressable market from that $5 billion to $11 billion by including not only the production of foam. But the production of fully finished private label mattresses that we can sell to our customers or ship directly to end consumers. Of a different but similar story in automotive, where we provide comfort and convenience features. We've started out in seeding comfort providing, lumbar support systems and seat suspension systems. Those use cables, motors and actuators. And we vertically integrated into those technologies and then recognize that, that allowed us to expand into convenience features, particularly with motors and actuators, expanding our addressable market from about $10 billion to $20 billion. We'll dig into those a little bit more. So competitive advantages is vetting-- We really have a very unique profile here. We can service our customers anywhere from components to finished goods, finished mattresses, adjustable foundations, accessories like pillows and toppers. The key here for us, again, drives from innovation. As we mentioned, our technology that we can develop our machinery equipment to develop very sophisticated innersprings more efficiently than anybody else. As well as the specialty foam capabilities that we have that drive tangible benefits to the consumer and differentiation for our customer. We also gain advantage from vertical integration, particularly in our rod, wire and spring businesses, a cost advantage. Here are some examples of products that we have in our bedding market, and we don't have much time, so I don't to want to spend much here, but you see coal flow solved the heat retention problem in memory foams, new foam product like [ grilla ] foam that adds strength that allows greater compression. And then I would just touch on the Echo based product there on the left. That's an [ Interstim ] product that takes a process out of our OEM customers' manufacturing process because we ship it with that blue [ polyesteral ] textile fabric there, that eliminates the gluing of a base foam. It's lighter, takes cost out and is more sustainable. Here's a look at our bedding value chain. So at the top, this is kind of rod wire spring. So we start with melting scrap in our reheat furnace, converting that to steel rod, converting that to wire, putting it into the equipment that we make to generate those high-value springs into innerspring cores that can be sold as components or used in hybrid mattresses that we produce internally. Similarly, on the foam side down there at the bottom, we create specialty polyols and foam additives to create specialty foam that can need to be sold as components, foam mattresses or hybrid mattresses. That's a very integrated business for us. Competitive advantage in automotive. Really, comfort and convenience features grow because of enhancing the consumer experience. And we work early on in the process with OEMs to help develop products that provide them with differentiation. We bring our engineering and technical prowess to the table to create those products that create that differentiation, but also meet the demanding technical requirements that are there in automotive. We have a very reliable program launch and product quality, which is also very critical to success in the automotive business, and we have a global footprint that allows us to serve all major markets and help our customers expand their programs globally. Here's a look at some of the products that we make. On the left there, you'll see a number of luxury massage systems from mid- to high-end. In the middle, you see some modular lightweight products, such as our modular smart metal alloy valve that's used in very small-- used in pneumatic products. I should mention here that our products can be used both in vehicles with internal combustion engines as well as electric vehicles, both benefit from smaller size, lighter weight and lower noise. And those more technical requirements are a benefit to us. And then on the right, you'll see some examples of motors and actuators. I'll take the middle one smart actuator, which is an all-in-one solution to allow a second and third row seats to recline, fold and to release the headrest. So just a few quick examples there. We'll spend much time here on our acquisitions. I think we talked about it pretty straightforward, look for things that are a strong strategic fit that are in attractive markets that have a strong competitive advantage. But we also take a really deep look into the financial screen. We want to make sure that it's accretive to EPS and to cash flow within a year and also provide returns well above our cost of capital. And we also think that cultural alignment is really important to successful integration. In 2022, we did 4 acquisitions. Probably the most significant was the hydraulic cylinders. We acquired a global manufacturer of hydraulic cylinders, so think big and technical for the heavy construction equipment market to build scale in our existing hydraulic cylinders business, but also enters into a very attractive segment of the market that aligns with long-term trends towards automation and autonomous equipment. So I think that's a great step forward for us. We've also been building our textiles business, both in the fabric converting, but primarily in our geo-textiles business, we did 3 of those small acquisitions. These are typically very small, low multiples that provide immediate synergies to us and strong returns. We did 2 Canadian geo-component distributors, those distribute erosion control, storm water management and various other applications and then a small fabric converting business. Sources of margin improvement. In the near term, it's fundamentally volume. As we talk about the consumer durable markets being slow at a relatively consistent level, but low, returning that volume will be the biggest margin improvement for us opportunity as well as for overhead recovery. I think beyond that, we have some opportunities to improve our operational efficiencies in particularly in our specialty foam business that I mentioned, and we've got progress there. After that, I think we've done a really good job maintaining pricing discipline, and we look to the ongoing opportunities which, I think, go back to as we talked about portfolio management, innovation, those sorts of things. And this slide is really about ESG. For us, I think we're really strong historically on the governance side, that is more of a maintain function for us. I think we have more opportunities to improve on the environmental and social side and I think are making good progress. On the environmental front, we'll file our third annual sustainability report next month. We've completed our first materiality assessment, so reviewing with our stakeholders to understand their priorities, assessing their potential impact to our business, setting our priorities that will help us set goals and then communicating our progress on those goals. We've also completed our first greenhouse gas emissions collection. We've completed those for 2019 through 2021, about to wrap up '22. We've got an assurance assessment going through those as well. I hope to report those in the second half of this year. And again, eventually, we'll get to some target setting. On the social side, we've made a lot of progress. We've really rebuilt and modernized our human resources infrastructure, making sure we're being competitive in how we treat our employees to help us attract and retain them. But we've also built out an inclusion, diversity and equity strategy that I think is well underway. We've built the infrastructure and now it's getting more tangible across our organization. It aligns with our values. I think it really will help us to be able to attract and retain top talent around the world and make our company more successful. I think the last slide here, is just our key takeaways. Our real focus here in the near term is continuing to focus on the things we can control to navigate this challenging macroeconomic environment. But our strong foundation and our strong financials and balance sheet give us comfort that we'll be able to navigate these economic cycles, continuing to fund the dividend with our strong cash flow, continuing to invest in opportunities going forward. And we'll continue to focus on our commitment to enhance our ESG capabilities. So last slide, let's just list our contact information for our IR team. They're always around and very happy to talk to you should you have any questions at any time.

Couple of minutes for Q&A. So I'll get started. I guess, first, to kind of build off the acquisition slide there, but Leggett has a long history of acquisitions. Can you talk about how you see kind of M&A playing in the growth algorithm, not really in the short term, but more kind of on a longer-term basis, do you see opportunities to further diversify the revenue base as well as through M&A.

Yes. That's a great question, Bob. I think it goes to the portfolio management that I talked about before. We've had -- We're getting a little bit less focused but have really historically had a strong base in consumer durables. And continuing to create some differentiation there is a good thing. I think our portfolio is in a really strong place. I don't think we need to do anything radical in the near or midterm really. So I think it is about continuing to build out where we have these growth opportunities, particularly around some of those newer businesses, building some scale. We've done a number of acquisitions to build out textiles. I think those opportunities continue as well. But in the longer run, I think it's looking at, call it, a longer-term megatrends, that will influence the future opportunities, being able to assess those and find areas that are a good fit for our capabilities and be able to translate our portfolio into those functions as we go on. Some of our businesses are very mature. If you think about our Home Furniture, Work Furniture businesses and looking out into the future to make sure we have growth opportunities is important from my standpoint.

Another question we get a lot is just kind of the sustainability of the higher steel margins. Let it's very unique that they're vertically integrated there for the betting business. Can you talk about some of the dynamics that might have changed over the last few years that could drive those to be higher than what maybe you and I are used to when we think back kind of the 10-year history here.

Yes, that's a great question as well, Bobby. And they've reached, I think, all-time high is really in 2022. I think there's a number of factors in play here. The first is some previous rightsizing of capacity in the industry and the rod industry over the last several years. So this isn't the last couple of years, but probably before that, where there's some excess capacity. And then I think you see the leaders of that industry being very thoughtful about the returns that they need to realize on the really high capital investment required to build these steel mills and to run them. I think the third impact probably comes from the Section 232 tariffs that were introduced in 2018 that increased the cost of imports. Those have remained in place, and we expect them to remain in place to make the U.S. market more competitive. I think the fourth one that is maybe not quite as well understood is the increase in input cost today besides scrap. So we think about material margin that's just a difference between rod and scrap, but there's other inputs on top of that energy, other kinds of metals. And those have increased significantly. So even just to maintain margins, those rod price has to be higher. And the final thing that I think is positive is the past the Infrastructure Act. I think that it will drive more construction, more civil construction that will increase the need for different types of steel materials as we go forward over the next several years. So I think those are the factors that I think will hold the material margin probably above the historical levels that you mentioned.

And then maybe let's switch gears, talk a little bit on bedding. It's really kind of been a few interesting years for the bedding industry with a lot of changes, growth of imports, imports coming down, a primary big competitor, a big bedding manufacturer file for bankruptcy. So can you maybe just update us on kind of what's happening in the industry, what's been some of the trends and kind of where the industry is today from kind of a, I guess, competitive standpoint or anything like that?

Yes. It's been certainly a dynamic cycle and tough to navigate. So we talked about this before. But of course, when we saw the pandemic in 2021, and then all of a sudden this focus on the home surged, and we hit supply chains. We were one of the first impacted. We recovered fairly quickly. But there's a surge in demand that I think accelerated into 2021 and well exceeded sort of the normal levels of growth. And then as we got into 2022, we saw that demand soften. Again, as we saw the impacts of inflation, consumer sentiment, interest rates, all those things tilt course. And so it led to softening through 2022, [ make ] industry forecasts show units down about 25%. So it's been relatively steady at a soft level, but still at a really soft level. From our perspective, we think that the decline in demand has offset the surge that we saw in those previous times. So we're sort of working in a moat here. And so I think when we see sort of this consumer durables, recessionary environment received, we'll see this return back to more normalized levels. But I think that might take a while to be there. You mentioned some of the bankruptcies that we've seen in the industry, I think, similar in some of the furniture industries, I think those are just indicators of the underlying situation of what's going on here, that it's a challenging environment. You see us and you see others with a strong financial base, strong cash flow, doing well and able to navigate that. It's not the most pleasant. Do I wish we had more volume? Yes, but it will be fine.

And then when you think about maybe international versus U.S., do you think the international side of your European bedding is also kind of [ U ] [ in that you at the bottom of the U where it's maybe bottoming a little bit or ] is that one a little bit different to predict.

Yes, that's a great question, and it's a little bit harder to answer. I think it's very similar. The difference there is the impact of the conflict in Ukraine. That made us take another step down and the real concerns around energy and inflation that fortunately weren't as bad as we thought through the winter, but there was a lack of chemical availability as well. But I think we see it stabilizing as well, again at a kind of a low level, but we'll have a little bit more concern there.

Lastly, one of the slides showed kind of the long-term margin targets. The business is below that today, clearly coming off multiple years of very challenging cost and supply chain environment. But can you talk a little bit some of the drivers and opportunities to rebuild the margin profile of Leggett. How much is volume related? How much is cost recovery and kind of where we are on the different, I guess, business units on that journey?

We'll take 20 minutes to walk through it all, but the biggest driver for sure is returning volume and returning the overhead recovery without a doubt. And that mainly applies across their bedding businesses, home furniture, work furniture. Those are probably the most impacted. When we look at our more industrial businesses, automotive, aerospace and [ drug cylinders ]. Those markets are expanding. It's just our customers working through their own capacity constraints to continue to do that. So I think that is, by far, the biggest impact. As I mentioned, we have some moderate opportunities for operational efficiency. We'll continue to focus on that. It's a great time during the slow demand period to improve that. Then I think we're getting back to innovation and customers caring about innovation as it gets to be a little bit stable, more stable environment. And in the longer term, that will drive that margin risk back to you. But if we got to more normalized volume and overhead recovery would be a heck of a lot closer to our targets.

Okay. Very good. Well, thank you for your time, and we appreciate you attending.